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You have information on several possible investments as laid out in the table below. A, B, and C are individual risky securities. For now, assume
You have information on several possible investments as laid out in the table below. A, B, and C are individual risky securities. For now, assume these are the only 3 risky investments that comprise the market. M is the market portfolio. Assume the risk-free rate it 3%. All returns are annual returns. Answer the following questions with respect to this investment information: (a) Calculate the risk for assets A, B and C. (3 marks) (b) Assume that you want to form a portfolio that consists of a long position of $18,000 in asset C and a short position of $6,000 in asset A. What is the expected return and risk of this portfolio? (5 marks) (c) You have $100,000 to invest. You would like to use a combination of the market portfolio and risk-free rate to obtain a standard deviation of 4% on your overall portfolio. How much (in dollars) do you invest in F if you choose the most efficient portfolio possible? What is the return of this portfolio? (5 marks) (d) Compare the portfolio you constructed in (a) and (b), which one would a rational investor prefer to hold, explain why. (2 marks) (e) You have $100,000 to invest. What is the maximum Sharp ratio you can obtain on a portfolio? Show the calculation. (2 marks) (f) You realize that asset C has the same return as the market portfolio. What does that tell you? Explain your findings. ( 3 marks)
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